Option Investor

Daily Newsletter, Monday, 9/10/2018

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

The Transports Quietly Break Out

by Thomas Hughes

Click here to email Thomas Hughes


The week opened with little fanfare despite a major break-out in the Dow Jones Transportation Average. The transports lagged the market during the summer 2018 recovery but are now leading the market higher. The Dow Jones Transportation Average climbed nearly 2% in today's session to break-out of a bullish triangle pattern to set a new all-time high. This move is important as the transports are a leading indicator of the economy and are pointing to further gains in 2018.

Asian indices were mixed as Sino-US trade relations continue to sour. Trump is set to add tariffs to virtually 100% of Chinese imports, and China says it will respond in kind (however they can, China exports 2.78X as much to the US as we send to them). The Japanese Nikkei eeked out a small gain, about 0.30%, while both the Chinese Shanghai and Hong Kong Heng Seng shed close to -1.25%.

European markets were uniformly higher in Monday trading although the gains were small. News from Italy and the UK helped support prices. In Italy, ministers say they will adhere to EU guidelines when forming their budget while in the UK Brexit negotiators say an agreement could be reached within 2-3 months. The CAC led with a gain near 0.33% while the UK FTSE lagged with a gain of only 0.02%.

Market Statistics

Futures trading was positive all morning, but the indicated gains were small, in the range of 0.35% for the Dow Jones Industrial Average and broad market S&P 500. The open was cool, calm and collected; the indices began the day with small gains and were able to edge higher in the first minutes of trading. After that action was muted, the indices held their gains but did not move significantly higher. A tight range persisted throughout the day leaving the SPX close to its opening level at the end of the session.

Economic Calendar

The Economy

The University of Michigan Index of Consumer Expectations fell -0.2% to 87.1. This is down -0.7% from the same time last year but still elevated and near long-term highs relative to the current recovery and historical data going back to WWII. The Consumer Sentiment Index also fell, shedding -1.7% in August, but is also still very high relative to the historical data.

Moody's Survey of Business Confidence fell sharply after spiking in the previous week. The spike and subsequent drop could be caused by the holiday last week but is remarkable regardless of the cause. Current conditions remain expansionary but forward outlook has deteriorated due to the trade war. Despite the volatility, Mr. Zandi says the index is consistent with global growth.

The third quarter earnings cycle is fast approaching, and the outlook is good. The next round of earnings reports is expected to produce growth of 20% for the S&500. The bad news is that growth expectations continue to fall under the pressure of global tensions. The third quarter outlook is down from a peak of 21.70% seen a few months ago due to lowered expectations in eight of the eleven S&P sectors. The good news is that we can expect earnings to beat expectations by about 4.5% which means growth could come close to 25% once the cycle is finished.

Looking forward growth remains robust although there have been some downward revisions. The fourth quarter outlook for earnings growth has been revised downward to 17.4% from a high of 19%. The outlook for the first and second quarters of next year have also been lowered to 7.2% and 7.5% respectively. The mitigating factor is that the second half of next year has seen upward revisions to growth outlook which have kept the full year 2019 estimates steady at 10.3%.

The Dollar Index

The Dollar Index shed about -0.30% in a session of quiet trading. The index is still trapped within a near-term consolidation, trading within a tight range between the short-term moving average and $95.50, but likely to break out of that range this week. Wednesday the FOMC releases the Beige Book, expected to show accelerating US economic activity, and on Thursday both the ECB and BOE issue policy statements. While both the ECB and BOE are on the path to tightening the BOE just raised rates and the ECB is not expected to issue hawkish comments so there is a significant chance the DXY will move higher. Also, US data this week includes CPI and PPI, both of which are expected to show an acceleration of inflation over the last month. A move above $95.50 would be bullish and will bring my target at the $100 level back into play.

The Gold Index

Gold prices held steady in Monday trading but look like they will move lower. Today's action resulted in virtually no movement but left the metal trading below the short-term moving average and my resistance target at $1,205. This move is likely focused on the Beige Book/ECB/BOE triple catalyst scheduled later this week and could result in a significant downward movement should the news support the dollar. A move above $1,205 could be bullish but will likely find additional resistance near $1,220. A move lower would be bearish and trend-following, my first target on such a move is near $1,180.

The Gold Miners ETF GDX fell another -1.5% in today's action. The index is falling hard on weakness in gold and expected weakness in gold due to a strengthening dollar, FOMC rate hike outlook and US economic strength. The ETF is indicated lower by both MACD and stochastic with the next target near $17.00. The only worry, aside from this weeks onslaught of central bank news, is a divergence in the MACD. It shows weakness in the bear market that is likely to bring the sell-off to an end; the problem is that divergence is a very non-specific indication. The market could continue to drift lower regardless of the divergence up to and until there's a reason to buy.

The Oil Index

Oil prices experienced some volatility today, but the overall move was not large. The price of WTI traded within a range of about 1% to create a small red-bodied candle beneath the short-term moving average. Today's action was driven by reports that negatively impacted supply outlook, offset by concern US inventory was building. On the supply side, Iranian sanctions have taken a toll on OPEC production while last week's rig count showed no new rigs were added in the US. On the demand side total US rig count is up more than 100 rigs from last year, the non-US count adds another 58 rigs, and US inventory did show a build last week. WTI is now indicated to move lower from the short-term moving average and may retest support at $66.50. A move below support might be bearish but would face additional support targets near $64.

The Oil Index tried to move higher in today's session but wasn't able to hold the gains. The index is bouncing from the long-term moving average, but the move isn't very strong at this time. The 150 day EMA has been supporting the market for about a year and will likely continue to provide support so long as earnings outlook for the energy sector remains positive. The energy sector is still expected to lead earnings growth through 2019; growth estimates have been on the rise and near 25% for the year.

In The News, Story Stocks and Earnings

Les Moonves is out at CBS. The CEO is the latest to fall for sexual misconduct and will not receive his golden parachute. The news is not a surprise, the scandal has been quietly building for some time, but it does make a deal with Viacom more likely. Shares of the stock fell about -3.0% on the news but found support near the middle of the long-term trading range and above the pair of moving averages.

Shares of Apple shed more than -1.5% after President Trump attacked the consumer products giant. President Trump says the company should assemble its products in the US to avoid tariffs, a move that analysts say would increase the price of the iPhone by at least 20%. Shares of Apple have now shed more than -5% since hitting their recent all-time high and are now approaching the short-term moving average. The company is holding its annual fall event scheduled for Wednesday and is expected to reveal the new iPhones.

The VIX fell nearly -5% in today's action but found support above the short-term moving average. The fear index created a medium sized red candle moving down to test support after breaking through the moving averages last week. The index has formed a minor near-term uptrend that is supported by the indicators so a spike in fear may be building. If the index moves up resistance targets are near $17.50 and $20, if fear subsides support is along the moving averages.

The Indices

Today's market action was quiet. While the broad market, industrials, and tech quietly moved sideways within near-term ranges the Dow Jones Transportation advance close to 2.0%, created a long green candle, broke out of a bullish triangle and set a new all-time high. This move is supported by the indicators which are both showing trend-following crossovers and suggests a continuation of the short-term trend. This means we could see the index advance as much as 1,200 points over the next two to three months.

The NASDAQ Composite posted the second largest advance with a gain of 0.27%. The tech heavy index created a small red bodied candle that advanced Friday's bounce and tested support at the short-term moving average. The 30 day EMA is providing support at this time, but the indicators suggest it will be tested again. A break through the moving average would be bearish and could take the index down to the long-term uptrend line near 7,700. A move up would be trend-following, bullish and confirm the moving average as support. If the index does move up the all-time high is my first target for resistance.

The S&P 500 posted the smallest advance with a gain of 0.18%. The broad market index created a small red bodied candle that advanced the Friday rebound and tested support at the previous all-time high. The indicators remain bearish, so another test of support is possible, even likely, although price action remains bullish for the short and long-term. A move up would be trend-following and bullish with targets at the all-time high. A move lower may be bearish if it takes the index down to close below the short-term EMA.

The Dow Jones Industrial Average posted the only loss with a decline of -0.22%. The blue chips index created a medium sized candle moving down within the near-term consolidation range to find support above the bottom of the range. The indicators remain bearish, so another dip lower is possible, my target for support is the short-term moving average. A move below the 30 day EMA would be bearish and could take the index down to the long-term uptrend line which is just below. A bounce from support at these levels would be bullish and trend-following.

Today's action in the indices was tepid at best, all except for the transports. The transports are exhibiting an incredibly bullish signal that, if you accept Dow Theory, will lead the entire market higher over the next couple of months. There are still concerns, trade relations are going to dominate the news for some time to come, but the outlook is good, the trends are up, and support levels are holding. I remain firmly bullish for the long-term and turning cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Volatility Remains

by Jim Brown

Click here to email Jim Brown

Editors Note:

The mixed market today was simply another symptom of lingering volatility. There were some story stocks that led the Dow to a minor loss but low volume was the real culprit. Only 5.6 billion shares traded and the least in 10 days and that includes the holiday week. Investors are waiting out the market to see if any rebound can find some traction. The minor gains on the Nasdaq, S&P and Russell suggest they are willing to buy the dip but not willing to chase prices higher. September's reputation for volatility has everyone waiting on the sidelines.


New positions are only added on Wednesday and Saturday except in special circumstances.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Up High, Down Low

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow opened higher with the rest of the indexes but closed on the lows for the day. Apple was a big loser after the president tweeted they should build phones in America if they do not want to pay tariffs. Boeing shares fell ahead of their August delivery numbers to be released on Tuesday. After the bell, they announced a $2.9 billion win for Air Force KC-46 tankers. Analysts believe production stoppages caused decline rates. UnitedHealth decline after the CEO sold $7 million in stock.

The rapid development of tropical storm Florence into a serious hurricane over the weekend caused Home Depot shares to spike at the open and give us a terrible fill on the position.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

HD - Home Depot
The long position was entered on the gap open.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

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Long and short equity trades = Premier Investor

Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.

BULLISH Play Updates

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